House Prices: The Impact of Supply and Demand

For some time now, we have attempted to shed light on the fact that pricing in today’s real estate market will be determined by the concept of ‘supply and demand’. If supply continues to increase and demand softens (or even remains constant) prices will continue to fall. Even the National Association of Realtors (NAR) has acknowledged this to be true.

The supply of inventory in the real estate industry is defined by the current months’ supply of homes that is available for sale. There are no steadfast rules that will apply to every category of housing. However, here is a great guideline by which to go:

1-4 months’ supply creates a sellers’ market where there are not enough homes to satisfy buyer demand. Appreciation is guaranteed.
5-6 months’ supply creates a balanced market where historically home values appreciate at a rate a little greater than inflation.
7-8 months’ supply creates a buyers’ market where the number of homes for sale exceeds the demand. Depreciation follows.

Where do we stand today?

According to NAR’s most recent Existing Sales Report, there is currently a 10.5 months’ supply of homes for sale. We can see, based on the guideline above, we are in a buyers’ market and that prices will continue to soften. The other statistic we must watch is the number of months’ of shadow inventory which will be coming to market.

CoreLogic just released their November report (which covers August). They estimate shadow inventory:

… by calculating the number of properties that are seriously delinquent (90 days or more), in foreclosure and real estate owned (REO) by lenders and that are not currently listed on multiple listing services (MLSs). Shadow inventory is typically not included in the official metrics of unsold inventory.

The report showed that shadow inventory jumped more than 10% in the last year, pushing total unsold inventory to 2.1 million houses.

That represents another 8 months of supply.

The Wall Street Journal reported that some analysts have said CoreLogic estimates look rather low.

Laurie Goodman, senior managing director at Amherst Securities Group, has warned that as many as seven million homes could end up in banks hands unless more aggressive modification regimes are put in place.

Barclays estimates that another 3.76 million homes are either in the foreclosure process or are at least 90 days delinquent but not yet in foreclosure.

Bottom Line

Most industry experts are projecting just that – an additional fall in prices of between 5-20%. Mark Fleming, chief economist for CoreLogic commented:

“The weak demand for housing is significantly increasing the risk of further price declines in the housing market. This is being exacerbated by a significant and growing shadow inventory that is likely to persist for some time due to the highly extended time-to-liquidation that servicers are currently experiencing.”

If you are thinking of selling, meet with a local real estate professional immediately. In most parts of the country, selling sooner may be better than later.